Covering a wide range of topics, our workshops aim to give you the knowledge
to make good choices in all areas of financial planning, taxation
and organising yourself for life in Portugal.

November workshops: Pensions

8th and 9th November

An informal round table format, we will be discussing issues such as:

• How different types of pensions are taxed in Portugal
• Where tax should be paid on different types of pension income
• Double taxation and how to avoid it
• Drawdown options and the tax implications
• UK pension changes: LTA abolition, impact on taxation
• Tax planning opportunities: Pre-April 2024 planning window
• QROPS & QNUPS: Do you really need one or should you keep your UK pensions?
• How to pass on your pensions and the implications for your beneficiaries
• Open Q&A throughout

December workshops: Inheritance Tax (IHT), Domicile & Succession

5th and 6th December

An informal round table format, we will be discussing issues such as:

• Portuguese & UK inheritance taxes: thresholds, rules and allowances
• Succession laws: UK rules, Portugal and forced heirship, Wills and Brussels IV
• IHT mitigation strategies and planning ideas
• Gifting: thresholds, rule and avoiding IHT clawback
• QNUPS: does it really shelter UK IHT in practice,
• How to protect family wealth, your beneficiaries and bloodline planning
• How to control family wealth during your lifetime and after your demise
• Open Q&A throughout

The workshops are taking place in two wonderful locations –

The Magnolia Hotel (Almancil) & Boavista Golf & Spa (Lagos)

November workshops: Pensions

8th November 2023
Boavista Golf & Spa,
Quinta da Boavista, 8601-901 Lagos
10am – 1pm (with a coffee break)

9th November 2023
Magnolia Hotel,
Estr. Da Quinta Do Lago, 8135-106, Almancil
10am – 1pm (with a coffee break)

December workshops: Inheritance Tax (IHT), Domicile & Succession

5th December 2023
Magnolia Hotel,
Estr. Da Quinta Do Lago, 8135-106, Almancil
10am – 1pm (with a coffee break)

6th December 2023
Boavista Golf & Spa,
Quinta da Boavista, 8601-901 Lagos
10am – 1pm (with a coffee break)

Sign up for the workshops below

It seems strange to think that gender differences can not only affect the way in which we think about managing our finances but the practical needs and requirements too. But with 60% of the UK’s wealth estimated to be in the hands of women by 2025 (a trend seen throughout most countries) being cognisant of these differences will put you – or the women in your life – a step ahead.

What are the issues?
Even today, studies show that despite 85% of women running household finances, over half of women defer to partners to manage and make long term financial decisions. There are several reasons for this, but a lack of confidence saw women shying away from taking a more active role. With 3/4 of women aged 60 either single, widowed or divorced, relying heavily on a partner can leave them disadvantaged.

Women live longer than men and their finances must therefore last longer. Recent ONS statistics predicted a lifespan of 83.1 years for women, and where planning has not been put in place, or put in place with a male’s longevity in mind, women may find themselves struggling in later years.

Women are naturally more cautious and conservative, but over the long term, such investments have lower growth potnential. A YouGov study showed that 55% of women had never held an investment vs. 35% of men.
80% of companies are paying women less than men. A 2021 study by NEST showed that the average working woman could have a pay gap of £70,000 at retirement. Similarly, women are more likely to have taken time out of employment or reduce hours to care of children and/or elderly parents and relatives. These career breaks not only directly affect income, but can affect promotion or progression opportunities. This has a knock on effect on finances and women are seen to have approx. 51% less in retirement savings than their male counter parts.

These factors mean that women must take a different approach to men when thinking about their finances. This is something investment providers are recognising. For example BlackRock, the world’s largest fund manger, has recently launched investment funds geared at women and aimed at addressing and incorporating the issues women face.

What can you do?
Develop your understanding and relationship with money. Ask yourself why you have certain feelings or views around money. What makes you uncomfortable? When do you feel this? Why? Identifying your strengths and weaknesses will help you on your financial journey.

Make time to set goals and develop your financial plan. Your plan should be specific and realistic otherwise you are setting yourself up for failure.

If you are still working, know your worth. Women negotiate less than men when it comes to pay – 33% of women vs. 43% of men. Do your research, demonstrate your value and remember, if you don’t ask you won’t get!

Invest your money. Saving money is one thing, but how do you build wealth for the long term? The single most detrimental impact on savings is inflation. As things get more expensive, your income and savings must also grow to keep up, and cash or bank deposits are not a good inflation hedge. Whilst investing does carry risk, it provides the best opportunity for inflation beating returns in the long run – an opportunity for women to use their longevity in their favour!

Don’t be afraid of investing and use professionals to help you get it right. Statistics show that women make better investors, often achieving better returns than men. A study by Hargreaves Lansdown showed women’s returns outperforming men by 0.81% over 3 years (over 30 years this would result in a portfolio value of 25% more).

If you are already investing ensure that you review things regularly and pay close attention to your investments. It is not uncommon to see portfolios that have not moved in many years due to high fees or poor performance.

Take control and build your financial confidence. This maybe through education or working with professionals, but it will allow you to identify and take advantage of opportunities, achieve financial independence and peace of mind.

Recent times have been tough for bond prices due to rising interest rates and inflation concerns, but there are signs that the bond market could now offer some interesting opportunities for investors.

The bond market is much larger than the stock market with figures from Morningstar valuing the market at approx. $300 trillion compared with the stock market at approx. $124 trillion, so it is a significant market for investors to understand.

What are bonds?
A bond is simply a loan that an investor makes to a government or company in return for a set interest rate, known as a coupon. For example, if you buy a 10-year 5% US Treasury bond for $100, you are lending $100 to the US government who will pay you $5 each year for 10 years and at the end of the term, you get your original capital of $100 back.

Investors like the predictable income and the relative stability of bond investments. They also complement shares which tend to be more volatile e.g. when share prices fall and investors are nervous, they often flock to the relative safety of bonds, which pushes up the value of bonds to compensate.

There are many bonds to choose from, each with different levels of risk, and therefore return expectations. For example, instead of buying a US treasury bond, you could buy a bond in Apple or BP and because there is more risk in lending to a company than there in lending to the US government, you can expect a higher coupon of say 6% or 7% to compensate for this increased risk.

Recent market issues – an exceptional period
In simple terms, traditionally, the prices of bonds move in an opposite direction to interest rates so when interest rates rise, bond prices fall.

Given that interest rates globally have been steadily increasing for the last couple of years, bond prices have naturally suffered.

One unusual phenomenon we have seen is that stock markets have also performed relatively poorly so we have seen bonds and stocks falling at the same time. This is a very rare event which has only happened three times in the last 45 years and many commentators believe the normal diversification and inverse relationship between bonds and shares will resume going forward.

Last week, we saw that UK 30-year bond yields rose to their highest level since 1998 and similarly, US Treasury yields are at a 16-year high, despite high interest rates. So why is this?

From a UK perspective, the recent mini-budget included tax cuts and increased spending, something that will need to be paid for through increased borrowing. The government does this by selling more bonds. But more government debt without the economic growth to support it spells increased risk for the economy and it is this that triggered a large-scale sell-off of UK bonds, reducing the price and therefore increasing yields.

Looking forward
There are three supporting factors for a positive outlook for bonds:

1. As bond prices have fallen, the yield available to investors has increased substantially which supports bonds and the outlook for prices going forward. As a result, bonds may provide an attractive level of income, and at relatively low risk levels, which has not been seen for many years.

2. Figures from Vanguard, the world’s second-largest fund manager, show that bonds typically outperform cash in the three years following peak rate hikes dating back to 1980. The Federal Reserve, Bank of England and European Central Bank have all signalled interest rates are close to or have peaked already. The consensus is therefore that interest rates and yields should fall over time, and as prices move opposite to interest rates, bond prices should rise.

3. Bonds have historically performed better than shares and cash during recessions. With concerns still lingering about economies entering recessions, bonds could again offer value in a portfolio.

Of course, we always have to point out that history does not always repeat itself and things may happen differently this time, but the alignment of several tailwinds for bonds is a positive signal.

When a bond is not a bond
Please note that there are also tax structures known as “investment bonds” which are not to be confused with the bonds we’ve discussed in this article. Investment bonds are a form of tax wrapper and they are often used by residents of Portugal (as well as being efficient from a UK tax perspective) to hold and manage investment portfolios.

Even with diligent preparation and thorough planning comes a mild sense of apprehension as the big moment approaches.

How many guests will show up?

With explanations, practical examples, and responses to audience questions, our hosts highlighted how to invest securely, successfully and tax-efficiently, adding that professional guidance is (of course) essential for achieving the most favourable outcomes, and avoiding potentially expensive pitfalls.

Richard Flood and Lorraine Reddaway from RBC Brewin Dolphin complemented these presentations with an insight into investor psychology and the behavioural impact of emotional decisions on investment returns – perhaps unsurprisingly, inexperienced investors are often poor decision-makers when it comes to wealth management.

RBC Brewin Dolphin’s approach to stock selection and portfolio construction provided reassurance on the value of professional asset management.

Both seminars were well attended, with many guests requesting meetings for immediate help and advice.

Our team in Portugal are also running two workshops in November:

Covering a wide range of topics, our workshops aim to give you the knowledge to make good choices in all areas of financial planning, taxation and organising yourself for life in Portugal.

With an informal round table format, we will be discussing issues such as:

• How different types of pensions are taxed in Portugal
• Where tax should be paid on different types of pension income
• Double taxation and how to avoid it
• Drawdown options and the tax implications
• UK pension changes: LTA abolition, impact on taxation
• Tax planning opportunities: Pre-April 2024 planning window
• QROPS & QNUPS: Do you really need one or should you keep your UK pensions?
• How to pass on your pensions and the implications for your beneficiaries
• Open Q&A throughout

Even if you are a Non Habitual Resident (NHR) with preferential tax status, UK and Portuguese property will remain taxable on both income and capital gains. However, there are certain planning opportunities you can tax advantage of in Portugal and the UK.

UK property planning
When selling UK property, you can deduct expenses associated with buying and selling the property, including professional fees and fees incurred on the transfer of property, such as stamp duty. You can also add any expenses incurred in enhancing the property to your base cost.

If the property has ever been your principal private residence (PPR) you can reduce or even eliminate the capital gains tax with main residence relief. This ensures that any period during which the property was your PPR is exempt from tax. For example, if you lived in the property for 5 years out of a total ownership period of 10, then only 50% of any gain would be subject to tax.

The property is also considered your PPR for 9 months after leaving the property so you can increase your tax-free ownership period.

UK allowances available
Even if you have left the UK, as a UK/EEA national you can retain your annual capital gains tax (CGT) allowance to offset any taxable gain, although this is reducing – the current allowance is £6k but falling to £3k from the 2024/25 tax year. If you hold property jointly with your spouse/civil partner, you can combine your CGT allowances (and income tax allowances if letting).

Timing is important
If possible, selling when you have not sold other assets will ensure your full CGT allowance can be set against the property gain.

If you are still UK tax resident you can also:

• time the sale when your income level is low, as your overall income level determines which CGT band will apply (18% for basic rate tax payers and 28% for higher and additional rate), and/or
• higher rate tax payers can potentially lower their tax bands via a pension contribution or donation to charity.

Non-Resident Capital Gains Tax (NRCGT)
If you are a Portuguese tax resident, you are able to benefit from NRCGT which is a UK tax concession which states that only the increase in value of property after April 2015 is taxable e.g. if you purchased a property in 2000, any increase in value between 2000 and 2015 is not taxed. This can substantially reduce your tax bill and wash out gains, and as stated earlier, you can still retain your annual CGT allowance.

If you also qualify for NHR there would be no tax in Portugal, which under normal circumstances would otherwise be taxed at progressive rates.

A further planning angle for those with NHR is that, if properties are held within a company, any dividend taken would be free of tax.

You may find the HMRC link useful when calculating your likely liability https://www.gov.uk/tax-sell-property/work-out-your-gain

Portugal property planning
Properties purchased after January 1989 are subject to capital gains tax on 50% of the gain. Property purchased before this date is not subject to CGT. Do note, NHR does not have any effect on the taxation of Portuguese property.

Some expenses are deductible, such as the buying and selling costs. In addition, inflation relief is available in Portugal if the property is held for more than two years.

It is possible to mitigate or even eliminate the taxable gain on a Portuguese main home by:

• Reinvesting in another property within the EU;
• Reinvesting in an approved investment structure; or
• A combination of the two e.g. if you sell a property for €1m, you can downsize into a smaller property for €500k and put the balance of €500k into an approved investment structure. This investment structure can then provide a tax-efficient income for life.

The amount that must be reinvested is the net sale proceeds, not just the gain. Any amount not reinvested is taxable under the normal rules.

There are nuances around these rules so please always seek professional advice. There are also complicated scenarios when selling property held by companies and specialist advice and calculations are required.

With rising interest rates, we have seen banks offering interest rates in excess of 4% or even higher with 1-year fixed terms. This coupled with the perceived risk of investment markets and the constant stream of negative news has left many wondering whether staying in cash is best.

Short term goals
Cash certainly has a place as an emergency “buffer” to allow for life’s unexpected events, and it is also sound financial planning to set aside sufficient for your short-term needs. Likewise, holding cash as part of an investment portfolio is important and it can help reduce the effects of volatility often seen in markets.

Cash as a long-term investment
Interest rates offered by banks to customers rarely beat inflation, so using this as a long-term savings strategy is not ideal.

Even with rising interest rates, the returns from cash are still negative when you consider that inflation currently sits at 7.9% in the UK, so investors are not getting any real returns. As an example, the negative effect of a modest 2% inflation on £100,000 over 10 years is £82,035 and £67,297 over 20 years.

However in the longer term, interest rate cuts are likely as the Bank of England is starkly aware that keeping interest rates high risks triggering a recession and destabilising the UK housing market. Central banks globally are also now close to pausing and then reversing recent rate hikes.

Protect yourself against inflation
Investing in high-quality company shares has been shown to offer inflation protection. Looking at long-term figures, Credit Suisse show that over a 123-year period starting in 1900, shares in developed equity markets have generated returns of 5.1% above inflation and emerging equity markets have achieved 3.8% over inflation.

The Credit Suisse figures also show that shares have outperformed cash (and bonds) in every one of the 21 countries its data covers over that 123-year period. This is quite remarkable given this period covers two world wars, two global pandemics, the great depression, the 2000 dot-com bubble, and the 2008 global financial crisis.

Opportunities elsewhere
Falling interest rates will provide opportunities elsewhere. For example, bond prices move in the opposite direction to interest rates so a future fall in interest rates is likely to result in capital gains on bonds, or holding shares allows investors to not only benefit from the increase in share price over time but income from dividends too.

If we look at the top 100 shares in the UK, analysts are expecting a dividend yield of 4.1% this year and 4.4% in 2024 and with the possibility for share buybacks added into the mix, this could be as high as 6% for 2023.

Tax considerations
Always consider the net interest rate you will earn. For example, a relatively attractive rate of 5% becomes a somewhat mediocre return of just 3.6% for a standard Portuguese tax resident who must pay 28% tax.

Also be cognisant that some of the more attractive rates being offered by banks in Guernsey and Jersey will have a higher tax rate applied of 35%, even if you are a Non-Habitual Resident.

The solution – balance
We believe a balanced approach of cash and investments makes most sense. The split however really comes down to your short- and long-term goals.

In short, cash is still king for short-term needs but for meeting longer-term income and growth objectives, stack the odds in your favour by using a sensible and well-diversified portfolio of shares, bonds and property. Coupling this with effective tax planning can lead to even more savings.

Lastly, Warren Buffet’s advice as one of the world’s most successful investors is, “The one thing I will tell you is that the worst investment you can have is cash. Cash is going to become worthless over time but good businesses are going to be worth more over time”.

You are probably quite au fait with your home country’s investment structures, options, and practices, but what happens when you move abroad? Just because your investments are tax efficient in one country does not mean that the tax advantages will transfer to another.

Mark Quinn and Debrah Broadfield look at the taxation of typically held investments in Portugal and what options are open to residents looking to legally shelter from taxation.

Bank accounts

All bank interest is reportable and potentially taxable in Portugal, irrespective of where the account is located or if you use it or not.

If you have Non-Habitual Residence (NHR), interest earned on foreign accounts is tax-exempt, unless the account is held in a blacklisted jurisdiction such as Guernsey, Jersey, or the Isle of Man, in which case it is taxed at 35%.  So, if you are still holding large sums in these ‘tax havens’ you should consider restructuring this.

If you are a non-NHR, all bank interest earned on foreign accounts is taxed at 28%. Similarly, interest from Portuguese bank accounts is always taxed at 28%, irrespective of your NHR status.

Dividends

We usually see individuals with dividends paid from their own companies, directly held shares, or investment portfolios. This is a great source of income if you are a NHR as these are tax-free in Portugal during the 10-year period.

It is worth thinking about what you are doing with the income once received. If you are not spending it all and it is accumulating in a bank account earning little or no interest, you should consider investing this in a tax-efficient manner to get your money working for you.

For normal residents, dividends are taxed at 28% but there is the potential for tax savings if you can restructure.

Property

Foreign-sourced property income is reportable in Portugal but is tax-exempt during NHR. Post-NHR, this income is taxed at scale rates (up to 48% plus solidarity tax at 2.5%/5%) with a credit given for tax paid in the country where the property is located (if there is a double tax treaty).

NHR does provide a unique tax-saving opportunity when selling a foreign property. Usually, 50% of any gain on sale is taxed in Portugal at scale rates, but if sold during the NHR period there is no tax to pay. Do note however that tax may still be due in the country where the property is located.

Striving for tax efficiency

One of the most common and tax-efficient ways to save is within an ‘offshore investment bond’. Such structures are recognised throughout most of the EU and in the UK.

Unlike a standard investment portfolio, that attracts capital gains and income tax as it arises, gains within an investment bond grow free of both income and capital gains tax. This is also known as ‘gross roll up’ and works in a similar way to a pension or a UK ISA.

The other main advantages over directly held investments are:
– You can control the timing of taxation. With standard investment holdings, when income or dividends are produced, they are deemed paid (whether actually paid out to you or not) and are taxable on an annual basis. With a tax-sheltered structure, income and gains are only taxable when a withdrawal is made.

– Withdrawals are very tax efficient. Withdrawals are split into capital and growth and tax is only payable on the growth. Although the tax rate on the growth element starts at 28%, you enjoy a 20% tax reduction after 5 years and a 60% tax reduction after 8 years.

It is worth knowing that this preferential tax treatment is enjoyed by both NHRs and standard Portuguese tax residents. And because the structure becomes more tax efficient over time, these are great long-term planning tools for those with NHR who intend to remain in Portugal once they are subject to the standard rates of tax post-NHR, or for long-term residents without NHR.

– These structures offer a unique tax planning opportunity for those who might return to the UK in the future. Under UK rules, only investment growth generated whilst resident in the UK is taxable. So, for those who have spent many years abroad in Portugal, this can create the opportunity for very advantageous tax planning on a return to the UK.

Lastly, choosing the right jurisdiction and provider is essential to ensure compliance in Portugal. You will also want to avoid jurisdictions with withholding taxes and bonds located in tax havens, as these are punitively taxed at 35%.

Many expats will be surprised to discover that even when selling their main home in Portugal, Capital Gains Tax (CGT) applies.

They may also not realise that when selling secondary or rental properties, tax is likely to be due in both Portugal and the country where the property is located. So, what do you need to know?

CGT
Portuguese residents are subject to CGT on their worldwide property gains. On the sale of Portuguese property, the tax treatment is the same for Non-Habitual Residents (NHR) and non- NHRs; 50% of the gain is added to your other income in
that tax year and taxed at scale rates.

For overseas property, there is no tax due in Portugal for NHRs but there is tax due (in the same manner as above) for non-NHRs. CGT is also likely due in the country where the property is located.

Can you mitigate any tax?
Despite the potential for eye-watering tax levels, some reliefs are available if the property you are selling is your home. The two mentioned reliefs can be used in isolation or conjunction.

1. Main residence relief: You can mitigate all (or a portion of) the CGT by reinvesting the sale proceeds (not just the gain) into another property in the EU or EEA. Any amount not reinvested is taxed
2. Reinvestment into a qualifying savings structure: This is a relatively recent relief and is particularly advantageous for those wishing to downsize (and therefore will not fully reinvest the sale proceeds), or for those moving back to the UK or elsewhere outside of the EU/EEA. There are strict criteria for qualification and we can advise on this area

NHR tax opportunity
For those with overseas property portfolios, selling these during the 10-year NHR period is much more tax efficient as the gain is exempt from CGT in Portugal. But hat about the tax due in the country the property is located? Let’s look at UK property as an example.

The UK only applies CGT to gains accumulated since 6th April 2015 and you will also have your annual UK CGT allowance to deduct (additional reliefs may also apply depending on your situation). If you bought an investment property in joint names in 1992 for £100,000 and it was sold today at £1m, ordinarily tax would be due on the £900k gain. But selling this as a non-UK resident, and assuming linear growth, you only pay tax on the gain since April 2015 i.e. £210,000.

You can effectively ‘wash out’ a large part of the gain simply by selling as a Portuguese tax resident and generating cash to fund your lifestyle.